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June 27, 2013

Morningstar Finds TDF Fees Falling, Assets Growing

Assets in target-date series crossed the $500 billion mark in the first quarter of 2013

Something of a hedge in confidence for a product that continues to generate controversy, but a report released Thursday from Morningstar details where target-date funds reside in their industry development.

The report, “Target-Date Series Research Paper: 2013 Industry Survey,” finds target-date series have become “established fixtures in defined contribution plans: assets are rising, fees are falling, and performance reflects strong broad market trends.”

It notes more target-date assets are shifting to passively managed investments, as both an underlying holding within a portfolio and as an overall investment approach. While 68% of target-date assets were in actively managed series as of Dec. 31, inflows to passively managed series—those that invest 80% or more in passively managed investments—surpassed flows into actively managed series for the first time for the 2012 calendar year.

Managers of target-date series have significantly increased allocations to non-U.S. equities. Since 2005, international stocks have risen from 24% of the average 2040 fund's equity allocation to 36%, as of Dec. 31. Emerging-market bond funds appeared in nine target-date series in 2008, compared with 18 in 2012.

"We found that target-date funds with significantly different asset allocations deliver similar retirement savings outcomes up to age 85,” Josh Charlson, Morningstar's fund-of-funds strategist and the study's lead author, said in a statement. "And as the target-date industry matures, we see an increase in diversification of the underlying investments in terms of both fund strategy and geographical location."

Using Monte Carlo analysis, Morningstar tested the likelihood that investors will be able to successfully retire. The firm defined success as whether or not an investor's savings would last through retirement.

Additional findings include:

Assets in target-date series crossed the $500 billion mark in the first quarter of 2013. While the industry's organic growth rate has slowed, its growth is still competitive with other broad mutual fund asset classes.

Fees continue to fall, as the asset-weighted average expense ratio dropped to 0.91% in 2012 from 0.99% in 2011.

The industry's market leaders—Vanguard, Fidelity and T. Rowe Price—still control about three-fourths of the industry's assets, despite impressive growth from some of the industry's smaller players.

Meanwhile, four target-date series shuttered in 2012: American Independence, Columbia, Oppenheimer and Goldman Sachs.

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